Indexing the Social Security Earnings Test to a Wage Series Two Years Old

Two exempt amounts, and neither one moves with the COLA

Benefit checks rose 2.8 percent in January 2026. The earnings test limits standing in front of those checks rose 4.62 percent and 4.83 percent. Two indexing rules sit behind those numbers, and a household that assumes the earnings test limit tracks the COLA will project the wrong figure.

The test withholds benefits from people who claim Social Security before full retirement age and keep working. Two exempt amounts apply. For years entirely before the year of full retirement age, the 2026 annual amount is $24,480, and the Social Security Administration states in Exempt Amounts Under the Earnings Test that it will "withhold $1 in benefits for every $2 of earnings in excess of the lower exempt amount." In the calendar year a person reaches full retirement age, the amount is $65,160 and the rate falls to $1 for every $3.

Neither figure is a cost-of-living adjustment. Section 203(f)(8)(B) of the Social Security Act ties both to the national average wage index, which measures wages rather than prices. When wages outrun prices, the exempt amounts outrun the COLA, as happened for 2026.

Where the 2026 monthly figure comes from

The statute names no dollar amount for 2026. It names a base year amount and a ratio. Section 203(f)(8)(B) directs that the exempt amounts "shall each be whichever of the following is the larger" of the amount already in effect, or the product of a base amount and "the ratio of— (I) the national average wage index (as defined in section 209(k)(1)) for the calendar year before the calendar year in which the determination under subparagraph (A) is made", measured against the 1992 index, or the 2000 index for the higher amount.

Read the index year slowly, because it is easy to get wrong. The determination for a given year is made during the preceding year, and the index used is the one for the year before that, so the 2026 amounts were computed in 2025 from the 2024 index. The regulation at 20 CFR 404.430, Monthly and annual exempt amounts defined puts it plainly: the agency uses the index "for the second prior year."

The arithmetic appears in the Federal Register notice Cost-of-Living Increase and Other Determinations for 2026, 90 FR 49047: "Multiplying the 2002 retirement earnings test monthly exempt amount of $2,500 by the ratio of the national average wage index for 2024 ($69,846.57) to that for 2000 ($32,154.82) produces $5,430.49. We round this to $5,430." The lower amount runs the same way from a 1994 base of $670 and the 1992 index of $22,935.42, producing $2,040.39, rounded to $2,040. The ratios are 3.045358 and 2.172196.

The annual amount is twelve times a rounded monthly amount

The order of operations matters. The statute rounds the monthly product, and 20 CFR 404.430 sets the annual amount at twelve times that rounded figure. The monthly product of $2,040.39 loses 39 cents, so the annual figure lands $4.68 below an unrounded twelve-month total. The sequence is written into the text, a pattern traced in The Annual Student Loan Limit Rounds Twice and Truncates Once Before Any Money Moves.

The rounding rule has two branches, stated in one clause: the product, "if not a multiple of $10, being rounded to the next higher multiple of $10 where such product is a multiple of $5 but not of $10 and to the nearest multiple of $10 in any other case." The first branch catches an exact midpoint, a product landing on $5 but not on $10, and sends it up; everything else takes nearest-ten rounding, the branch both 2026 products took.

There is also a floor. "Whichever of the following is the larger" means the indexed product competes against the amount already in effect, so a falling index would hold the amounts rather than cut them. For 2026 the products beat the 2025 monthly amounts of $1,950 and $5,180, so the indexed values won.

Fifty percent, thirty-three and a third percent, and a truncation to the dollar

Crossing the exempt amount does not withhold the whole benefit. Section 203(f)(3) puts the rate and the carve-out in one sentence: "For purposes of paragraph (1) and subsection (h), an individual's excess earnings for a taxable year shall be 33 1/3 percent of his earnings for such year in excess of the product of the applicable exempt amount as determined under paragraph (8) in the case of an individual who has attained (or, but for the individual's death, would have attained) retirement age (as defined in section 216(l)) before the close of such taxable year, or 50 percent of his earnings for such year in excess of such product in the case of any other individual, multiplied by the number of months in such year, except that, in determining an individual's excess earnings for the taxable year in which he attains retirement age (as defined in section 216(l)), there shall be excluded any earnings of such individual for the month in which he attains such age and any subsequent month (with any net earnings or net loss from self-employment in such year being prorated in an equitable manner under regulations of the Commissioner of Social Security)."

Three things sit in that sentence. The "or" splits the rate: one third in the year of full retirement age, one half in every earlier year. The phrase "multiplied by the number of months in such year" is why the annual threshold is twelve monthly amounts. And "except that" drops earnings for the month of attainment and later, so someone reaching full retirement age in October is measured on January through September earnings against the whole $65,160.

The paragraph then adds a step few summaries mention: "The excess earnings as derived under the first sentence of this paragraph, if not a multiple of $1, shall be reduced to the next lower multiple of $1." That is truncation, not rounding, and the verb is "shall."

Take a beneficiary under full retirement age for all of 2026 with $40,001 in wages. Earnings above the exempt amount are $15,521, half of which is $7,760.50, reduced to $7,760. Fifty cents is trivial; the direction is not, since the same sentence governs the one-third calculation and its repeating decimals.

Earnings here are narrower than household income. Under 20 CFR 404.429 the term "includes the sum of your wages for services rendered in a taxable year, plus your net earnings from self-employment for the taxable year, minus any net loss from self-employment for the same taxable year." Wages count gross: they "include the gross amount of your wages rather than the net amount paid after deductions by your employer for items such as taxes and insurance."

Charging the excess to months, starting in January

Excess earnings are not spread evenly across the year. Section 203(f)(1) charges them to the front of it, starting with an amount equal to the payments due on that record for the first month, "and the balance, if any, of such excess earnings shall be charged to each succeeding month in such year to the extent, in the case of each such month, of the sum of the payments to which such individual and all such other persons are entitled for such month under section 202 on the basis of his wages and self-employment income, until the total of such excess has been so charged."

Two details shape the year. The measure for each month is the sum of payments to the worker and to the other persons entitled on that record, not the worker's own check; the statute excludes "divorced spouses referred to in subsection (b)(2)" from that sum. And an earlier parenthetical lets a month absorb less than a full month of payments, leaving one partial month at the end of the run.

Continue the example. If total monthly payments on the record are $1,600 and excess earnings are $7,760, January through April absorb $6,400. The remaining $1,360 goes to May, leaving $240 payable. June through December are untouched.

The grace year puts a monthly test in front of the annual one

A person who retires in June has already earned half a year of salary, and the annual test alone would withhold benefits for months with no work. The answer is the grace year. 20 CFR 404.435(b)(1) provides: "A beneficiary's initial grace year is the first taxable year in which the beneficiary has a non-service month (see paragraph (a)(7) of this section) in or after the month in which the beneficiary is entitled to a retirement, auxiliary, or survivor's benefit." A workless month before the month of entitlement does not open the grace year. Benefits are payable for each non-service month in a grace year, whatever the annual total.

A non-service month turns on three conditions joined by "and" in section 404.435(a)(7): the beneficiary does not work in self-employment, does not "perform services for wages greater than the monthly exempt amount set for that month", and does not "work in non-covered remunerative activity on 7 or more days in a month while outside the United States." For 2026 the wage threshold is $2,040, or $5,430 in the qualifying months of the full retirement age year. Note the comparison operator, which is wages greater than the monthly amount.

Self-employment is measured in hours before it is measured in dollars

For the self-employed the monthly test asks about services, not receipts, since self-employment income often arrives months after the work. The factors sit in 20 CFR 404.446, and 20 CFR 404.447(a) attaches thresholds: fewer than 15 hours a month across all trades and businesses is not substantial, "not more than 45 hours" ordinarily is not, and more than 45 hours ordinarily is.

Read the two 45-hour findings as presumptions, not cutoffs. Each of them carries an "unless" clause: the under-45-hour finding gives way where other factors make it unreasonable, the over-45-hour finding where the individual can be shown to be reasonably considered retired that month. The 15-hour floor is not a presumption: section 404.447(a)(1) states that "the services of less than 15 hours rendered in all trades and businesses during a calendar month are not substantial." That is the difference between a rule that permits an outcome and one that commands it.

Withheld months return as a smaller reduction factor

Withholding is not forfeiture. The Social Security Administration states that once a beneficiary reaches normal retirement age, "your monthly benefit will be increased permanently to account for the months in which benefits were withheld." The mechanism is 20 CFR 404.412, which lists months not counted when a benefit is reduced for early claiming, beginning with "Months subject to deduction under § 404.415 or § 404.417". Months in which the test produced a deduction drop out of the age reduction, so the factor shrinks from full retirement age forward.

One consequence is easy to miss: the test reaches other people on the record. Under 20 CFR 404.415, Deductions because of excess earnings, the agency "will reduce husband's, wife's, and child's insurance benefits payable (or deemed payable) on the insured individual's earnings record because of the excess earnings of the insured individual." A divorced spouse divorced for at least two years is carved out. Reading only the worker's own check understates what a year of wages costs, as a single-cap reading understates a wage order, traced in Reading a Garnishment Order Means Running Two Caps and Taking the Smaller One.

Numbers to Re-check

Four figures move on their own schedule, and three move by a rule that is not the COLA.

The index year. The 2026 amounts use the 2024 wage index of $69,846.57; the 2027 amounts will use the 2025 index. As of late September 2026 the 2027 determination has not been published, so figures circulating for 2027 are projections.

The two growth rates. The lower annual amount went from $23,400 to $24,480, up 4.62 percent; the higher from $62,160 to $65,160, up 4.83 percent. The 2026 COLA was 2.8 percent. Wage indexing and price indexing are different rules.

Monthly against annual. The monthly figures are $2,040 and $5,430, and the annual figures are exactly twelve times those. A monthly threshold only works inside a grace year.

The wage base is a separate number. The 2026 contribution and benefit base is $184,500, which caps taxable wages. It appears in the same Federal Register notice, which is why the two get swapped.

Where This Doesn't Apply

The test has a narrow reach, and several adjacent situations run on other rules.

Months at or after full retirement age. 20 CFR 404.430 is explicit: "Your earnings after reaching the month of full retirement age are not subject to the earnings test." That age depends on birth year: the agency's table sets 66 and 10 months for 1959 births and 67 for 1960 or later.

Disability insurance benefits. 20 CFR 404.415 excludes disability insurance benefits based on the beneficiary's own disability, and 20 CFR 404.435, Excess earnings; months to which excess earnings can or cannot be charged lists months of entitlement to such a benefit among those not reduced. Work by disability beneficiaries runs on a separate framework.

Income that is not wages or self-employment earnings. The definition in 20 CFR 404.429 reaches wages plus net earnings from self-employment, less net loss. Categories outside it are outside this test, though they can matter elsewhere, including the separate formula for how much of a benefit is taxable.

Certain divorced spouses. The reduction of family benefits does not reach a divorced spouse divorced for at least two years, a carve-out dating to January 1985.

Noncovered work outside the United States. 20 CFR 404.417 applies a separate test to noncovered remunerative activity performed abroad, framed in hours rather than dollars: "a 45-hour work test applies before a benefit deduction is made for the non-covered remunerative activity performed outside the United States in a month by the type of beneficiary described in paragraph (a)(1) of this section."

None of this is a recommendation about when to claim or how much to work. It describes how one federal formula is assembled: a statutory base amount, a wage index two years old, a $10 rounding step with two branches, a floor against the prior year, a percentage, a truncation to the dollar, and a charging order that starts in January.